Share:

Firms are exposed to a variety of low probability / high impact risks which may disrupt their operations and supply chains. These risks are difficult to predict and quantify, and therefore difficult to manage. As a result, managers may deploy countermeasures sub-optimally, leaving their firms exposed to some risks while wasting resources to mitigate other risks that would not cause significant damage. In a three-year research engagement with Ford Motor Company, we address this practical need by developing a novel risk exposure model that assesses the impact of a disruption originating anywhere in the firm's supply chain. Our approach defers the need to estimate the probability associated with any specific disruption risk until after the company learns how the realization of such a disruption will impair its operations. As a result, the company can make more informed decisions about where to focus its limited risk management resources. We demonstrate how Ford has applied this model to identify previously unrecognized risk exposures, evaluate pre-disruption risk mitigation actions, and develop optimal post-disruption contingency plans, including circumstances in which the duration of the disruption is unknown.